Blog Lease Vs Finance – Is Leasing Or Buying A Car Better?

Jun 29, 2020

Find Out If You Should Lease Or Finance Your Next Car

Lease vs finance – which is the best option? This is the question everyone is faced with when it comes time to shop for a new ride. Of course, depending on who you talk to, you’ll get a completely different opinion on which option is best and why.

Husband and wife talking to car salesman

There are people who have always buy and finance cars and others who have always leased and always will. Some will make their decision depending on the market conditions and whichever option at the time offers the best financial advantage.

So, which is the best choice? There really is no clear-cut answer. It comes down to your specific driving needs and financial situation. In this blog, we’ll compare the options between leasing versus financing, the pros and cons, and answer common questions.

What Is A Car Lease And How Does It Work?

Leasing a vehicle is similar to a rental agreement. It allows you to drive a new vehicle for a specified period of time. They typically last anywhere from 2 to 5 years. With a lease, you are paying to use the vehicle. You are only paying for the vehicle value that you use during the lease. Once the lease is up, you return it. You have the option to buy the vehicle outright if you so choose.

Leases can come in many types. There are standard leases, lease to own, and lease takeovers.

One key distinction with leases is there are some restrictions. You are subject to a kilometre restriction, there are early termination fees, and you may be required to pay for excessive wear and tear when retiring the vehicle.

What Is Vehicle Financing?

When you finance a vehicle, you are borrowing money from a financial lender. When you finance an auto loan, you have entered an agreement to make monthly payments. You will pay more per month compared to leasing. Once the loan is paid, you will own the vehicle.

Auto dealers have relationships with a number of lenders. You can choose one of their lending partners, or get financing on your own.

It Is Better To Lease Or Finance A Car?

Before you can make a determination about leasing or finance, you need to understand your driving needs and habits and, more importantly, which option makes the most financial sense.

Ask yourself :

  • How much of a monthly payment can I afford?
  • What is more important – the monthly payment or total cost of the vehicle?
  • How will I pay for the car – cash on hand? Financing? Line of credit?
  • Do I plan to make a down payment?
  • How many kilometers do I drive?
  • Do I want/need a new automobile every few years?
  • Do I want something to trade in on my next vehicle?

Even though choosing an automobile can be a very emotional decision, you need to make a rational decision, especially when it comes to finances.

Lease Vs Finance A Car Considerations

Once you’ve figured out what you can afford, you need to consider the vehicle features you want/need and how you will use the vehicle.

  • How long would you like to keep automobile?
  • How many kilometers do you drive annually?
  • Do you take care of your automobile or stick to a maintenance schedule?
  • Do you want to add any modifications to the vehicle?
  • Is it important for you to have equity in it?

What’s The Difference Between Leasing And Financing?

The key difference between leasing and financing is vehicle ownership. At the end of a financing agreement, you will own the vehicle. With a lease, you will not own the car. With financing, every payment you make goes toward paying off your loan. Once the loan is paid off you have 100% equity in the vehicle.

Is It More Affordable To Finance Or Lease A Car?

The overall car cost of leasing versus financing can change based on the term. In the short term, with all things the same (term, price, interest rate, down payment) a monthly lease payment will be more than 30% less than a monthly finance payment.

However, as the length of the term gets longer, things begin to balance out. Monthly payments can be fairly even for medium term agreements. In the long term, financing can actually be cheaper than leasing. Consider all financial factors, terms, and options to find out which option is the cheapest and meets your financial needs.

Compare your cost options by using this Government of Canada calculator.

When Is It Best To Lease A Car?

Ownership costs can quickly add up and drivers continually search for ways to reduce those costs. For some people, leasing is one significant way to reduce the monthly costs. According to Forbes 1 in 4 people make the choice to lease over buying.

Studies show that people who lease are as satisfied as those who finance an automobile. According to a CTV news article 66% of people who lease were very satisfied compared with 69% who were very satisfied with financing or buying.

When you lease, you are entering an agreement with a leasing company that gives you the right to drive the vehicle of your choice. Leasing is similar to a long-term rental. Your payments don’t build equity as an automboile loan and payments do.

You can still negotiate terms of the deal such as the length of the lease, your monthly payment, the rate of interest, amount of kilometers you can drive for the duration known as wear and tear)and a buyout price (residual value) at the end of the contract – in the event that you decide to buy it.

Reasons Leasing Is A Good Option

  • You Want To Drive A New Vehicle : Lower monthly payments allow drivers to drive a model that they may not be able to drive if they had to buy or finance it.
  • You Like Getting A New Car Every Couple Of Years : If you like driving with the latest features and technology, leasing is a great way to get a new one every 2-4 years.
  • You Want Lower Monthly Payments : Many people need to watch their bottom line and keep monthly expenses as low as possible. Leasing allows people to drive a new automobile for less than financing a new one.
  • You Don’t Drive A Lot Of Kilometers : If you don’t drive a lot, you don’t have to worry about kilometer limits.

When Does It Make Sense To Buy Or Finance A New Car?

Man inspecting vehicle

Owning gives drivers much more flexibility with how they use their car and what they do to it. Buying allows you to make modifications, drive it as you please and you can also use it as an asset.

If you have the resources, you can pay with cash – an option that gives you good negotiation power. However, most people take out a loan. You can secure a loan through the dealership you are working with, but you can also get a loan with your bank, a lending company or even use a personal line of credit. So you have options.

When purchasing a vehicle using a loan, your lender is the one who owns the car until you finish paying off the loan. You can negotiate the term of the loan, the interest rate and the monthly payment with your financer.

Reasons Buying Or Financing A Car Is A Good Option

  • You Drive A Lot : When you own your car, you don’t need to worry about the distance you drive. With a lease, there are mileage limits and financial penalties if you exceed them.
  • You Plan To Keep The Vehicle For A Long Time : Once you pay off your car loan – which is often a 48- to 60-month term, you own the car. It’s an asset you can use toward trade in value on another new automboile or continue to drive payment-free.
  • You Want to Customize Your Car : Some people just like to add extra features such as specialty tires or safety features. If you lease a vehicle, you have to remove any modifications or customizations you have made when the contract is up.

What Are The Pros And Cons Of Financing Vs Leasing A Car?

Here are some major comparison points to considering when weighing the pros and cons of leasing versus financing :

Car Ownership

  • Financing : When you buy a car with a loan – you fully own it at the end of the agreement.
  • Leasing : You do not own the automobile. You only have the right to drive it. At the end of the agreement, you return it to the leasing company. You also have the option to buy it for the residual value stated in the contract.

Mileage Limits

  • Financing : You put as many kilometres on it as you need to. Remember – higher kilometres means lower resale value.
  • Leasing : You agree to a limit of kilometres for the duration. If you exceed the limit, you will pay a per kilometer fee for overages.

Excessive Wear And Tear

  • Financing : You don’t have to worry about long term wear and tear – but keep in mind that excessive wear and tear will devalue it.
  • Leasing : You will pay extra fees if your car shows signs of excessive wear and tear.

Car Modification Or Customization

  • Financing : You can make as many modifications or customizations wheb you own it.
  • Leasing : You make modifications, but before you return it, you may have to change it back to its original state.

Ending The Agreement Early

  • Financing : You can sell or trade it in whenever you want or need to. You will still need to pay off the outstanding loan amount.
  • Leasing : In most cases, you will be charged a fee for breaking the lease before the end of the term. The costs can be as high as paying out your monthly payments.

Returning The Vehicle

  • Financing : You are responsible for selling or trading it in.
  • Leasing : You bring your car back to the leasing company. You may have to pay some end-of-lease costs.

Does Leasing Or Buying A Vehicle Affect Insurance?

Your decision to lease or finance does not have a direct impact on your insurance cost. However, when leasing, you will need to meet the leasing company requirements.

Since your leasing company still owns the vehicle you will need to have certain coverage in place to protect the vehicle. Leasing companies will require you to have comprehensive insurance and collision insurance.

You will also need to carry a certain amount of third party liability coverage and specific policy endorsements.

Your decision to lease or finance could have a slight impact on your coverage needs.

Lease Or Finance FAQs

There are advantages and disadvantages to both options. It depends on your financial situation, market conditions and personal preference. Leasing can be a better option if you prefer to have new vehicle every few years and you want to have lower monthly payments.

It depends. For many drivers, leasing does not make financial sense because you don’t get anything in return once your lease is up. You have to return the vehicle. But, if you are fine with turning in your lease for a new lease, it may be worth it to you.

When leasing to own, you will eventually own the vehicle like when you finance. The main difference is the vehicle owner (dealership) will hold onto the vehicle title when you lease to own until it’s paid off. When you finance, the title is transferred over right away.

Financing a used car is an effective way to purchase a more affordable vehicle. Most people only lease when they buy a used car if they have low or bad credit. It’s a way to get a vehicle when you have less than ideal finances.

Leases are typically available for a minimum of two years. However, some dealers may offer a one year lease, but it is not common.

In a finance lease, ownership is transferred to the lessee at the end of the lease term. In an operating lease, ownership is retained by the lessor during the term.

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